Geopolitical Monkey Brain

War bad.  Peace good.  War starts ---> Sell.  War ends --->  Buy.   That's the monkey brains behind the knee jerk reaction that you saw Sunday/Monday in the overnight futures.  About the only move that made some logical sense was the move higher in crude oil, but even that is a bit of a stretch, only because it could maybe make it harder for Iran to sell some of its black market oil barrels.  Maybe.  But probably not.  

The primal urges tell the average investor to sell and ask questions later.  I bet you if this happened in the middle of Africa, let's say in Nigeria (where crude oil is actually produced), people could care less.  Some lives are more equal than others.  Black lives (especially African) and Muslim lives are definitely less equal than Jewish lives.  People were getting massacred in Syria (on a much bigger scale), and most people could care less.  The markets sure didn't care.  But its happening in Israel, and there are a lot of people in finance who manage a lot of money who are Jews.  And they have intense interest in this event.  That amplifies the kneejerk reaction to the news.  Nothing against the Jews, but they have a lot of power.  They are a minority group that control a lot of money. 

This is nothing like Russia invading Ukraine.  Russia is a huge country.  Israel is not.  Russia produces a ton of commodities, including 10% of the world's oil, and a huge amount of natural gas.  Israel does not.  That was a legitimate market mover, because of the great uncertainty, but even that turned out to be a relative non-event for the crude oil market in the long term.  War in Israel matters to Israel.  It doesn't matter to the rest of the world.  But you'll see the 5 minute Middle East geopolitics experts come out of the woodwork using mental gymnastics on how this war in Israel has a huge effect on the world, espousing their expertise on Twitter as if its a public service!  I'm just a simpleton who believes that wars are local, and have local effects.  World Wars happened 2 times in the last millennia.  They are the exception, not the rule. 

Its painful to listen to CNBC, but its part of the job.  Trading alone, the quickest way to get exposure to the zeitgeist of the market is through Twitter, CNBC, and Bloomberg.  The doom and gloom was palpable.  The crowd was already leaning heavily bearish after that "blockbuster" NFP report, but this just put them over the edge.  It didn't match the 0.6% gap down in the futures.  If you had only heard the financial media and seen the tweets, you would have thought the SPX futures were down 80 points.  They were down 30.  Its going to take a big move higher from here to get rid of that gloom and doom.  Gloom and doom is a not a long term stable psychological condition.  Its temporary, and when it subsides, stocks are usually higher. 

Most of the last 3 weeks have been risk off days, with the focus squarely on the plunging bond market.  Now that you have a war in Israel, which should be a nothingburger for the bond market, but with emotions high, and bond shorts nervous, its has provided a backdoor bailout for stuck longs in long end of the Treasury market.  I don't expect this bond bounce to last long, but it probably keeps the shorts away for at least a few days to give the beaten up longs some breathing room before the shorts pounce again.  That breathing room should be enough to provide some upside fuel for stocks in the coming days.  We've had a slow motion capitulation over the past 2 weeks, it culminated with a panic gap down on the blowout NFP number, which cleared out the last remaining nervous longs, to allow for this bounce.  With the war leading to Treasuries now showing some signs of life, you can't be negative on stocks, not until you get a healthy bounce into real resistance, which is around 4450-4500 SPX.  There is a lot of air up above current levels, between SPX 4340 to 4450.  That air pocket means that if investors decide to reallocate to stocks, you could see a quick move up to 4450, possibly by early next week.  

Back to fundamentals.  On Monday, you saw a parade of Fed speakers come out and voice their views, as they love to do.  These Fed governors feel so self-important, and are always out there giving their two cents.  It seems like the tide is slowly changing from hawkish to dovish.  Yes, they are still on the hawkish side, but overall, they seem much closer to neutral than hawkish when you hear them.  Lately, in response to the big move higher in long term yields, they seem to view that as doing the Fed's work for them by tightening financial conditions, making it less necessary to hike again.  Its looking less likely that the Fed will hike in November, and Fed funds futures are pricing in only a 14% chance of a hike at the next meeting.  A month ago, the hike probability was at 44%. 

With the Fed quiet period less than 2 weeks away, Powell or Nicky Leaks of the WSJ will have to signal a rate hike soon if they want to get a hike done at the next meeting.  But I don't sense any urgency on the part of Powell to do that.  He seems content to go for that soft landing, even as he tries to talk out of both sides of his mouth by saying there could be a hard landing.  Actions speak louder than words.  His actions appear as if he's intent on going for that soft landing to prevent Trump from getting elected in 2024, which would be a de facto termination of his tenure soon afterwards.  

So what did we learn since the nonfarm payrolls report on Friday and the start of the war on Saturday?  

1.  The NFP and CPI are now nonevents as far as determining future Fed rate hikes.  They will become important market events again when the Fed is getting closer to rate cuts in 2024.  

2.  Bond yields appear to have overshot the upside in a panic last week, and there are few sellers left at these levels, at least for the next several days.  Even with that jobs number on Friday, and then the big move higher in crude oil, the flight to safety bid was actually able to overpower the higher crude move.  Now with the flight to safety premium in play until market players calm down, you have a short window where bonds won't be a huge headache for those long stocks.  This is the window of opportunity for the SPX to make its move higher.  

3.  Geopolitics is overrated.  And overhyped.  It usually pays to fade the geopolitical kneejerk reactions in the market, especially when they happen over the weekend. 

The price action in stocks and bonds with the news flow has given me more conviction in my short term bullish view on SPX.  Staying long.